Insurance companies have always been an effective villain in the health-care-reform debate, but this year the industry thought things might be different. Recognizing the growing sentiment for some kind of change and fully aware that universal coverage would help bulk up their rolls as baby boomers age into the Medicare system, private insurers early on declared their (albeit qualified) support for President Obama's health-reform effort. So when word came last month that the Democrats were drawing up a new public-relations battle plan, the insurance companies were sent reeling  and seemed to be caught off-guard. A late July memo from the House Democratic leadership about how to sell reform during the congressional August recess told members, "Hold the insurance companies accountable." House Speaker Nancy Pelosi called private insurers "villains," and President Obama, in an exclusive interview with TIME, framed his push for changes to the U.S. health-care system as "insurance reform." (Read TIME's report "The Five Biggest Hurdles to Health-Care Reform.")

In their view, the insurance companies were being thrown under the bus. During an Aug. 4 conference call with reporters, Karen Ignagni, lead lobbyist for the industry, described the Democrats' marketing push as a new campaign "launched to demonize health plans" and "the same-old Washington politics of 'find an enemy and go to war.' " Said Ignagni before declaring insurers' support for reform: "Attacking our community will not help get anyone covered."

(In return for the support of one potential foe, the pharmaceutical industry, the Obama Administration reportedly made a side deal to limit drug spending cuts in any health-care reform bill to $80 billion. According to the New York Times, the Administration reaffirmed the deal after the drugmakers expressed concern that Congress might push for even bigger cuts.)

Despite its protests that it is being unfairly vilified, the insurance industry is far from ready to simply accept the reform proposals currently on the table. Most of its efforts are concentrated on defeating the creation of a public-health-insurance alternative primarily for Americans currently priced out of the private-insurance market. But the industry's opposition to Democratic reform proposals goes far beyond the public option, which it believes will have an unfair, government-afforded advantage over insurers, and the industry is quietly lobbying for legislative language changes that could have major consequences. (Read TIME's special report "What Health-Care Reform Really Means.")

Insurers have agreed to discontinue practices like turning down customers in the individual and small-group market who have expensive pre-existing conditions and basing premium rates on health status and gender. But one variable that will persist is age, since older enrollees represent more health risks than younger enrollees, and insurers are doing their best to retain the most flexibility in that area. Current reform legislation in the House and the Senate Health, Education Labor and Pensions (HELP) Committee would allow insurers to vary premiums on the basis of age only by a factor of two, meaning insurers would be allowed to charge older enrollees premiums that are twice as high as those for younger ones. (In the health-policy world, this is known as a 2-to-1 age rating.) That may sound like a huge concession to private insurers, but they insist it would lead to only one of two scenarios: financial ruin for private insurers or exorbitantly high premiums rates for young Americans.

"You couldn't do business at 2 to 1. The younger people's premiums would just be too high," says Charles Kahn, president of the Federation of American Hospitals, a lobbying group for investor-owned hospitals, and a former lobbyist for the insurance industry during Bill Clinton's health-care reform battle in the 1990s. Essentially, a wider "age band," like the 5-to-1 ratio insurers favor, would allow them to charge higher amounts to middle-aged people not yet old enough to qualify for Medicare, while keeping younger people's premiums much lower. In a recent letter to Henry Waxman  chairman of the House Energy and Commerce Committee, one of five congressional committees with jurisdiction over health reform  the president and CEO of Blue Shield of California wrote, "Given the systematic consequences of imposing such a tight band, we strongly urge you to widen it."

Insurers are also keenly aware that they can afford to offer coverage to everyone who applies only if coverage is truly universal. "If there's a requirement that everyone will participate, it's possible to do these market reforms without cost skyrocketing," says Robert Zirkelbach, spokesman for Ignagni's group, America's Health Insurance Plans (AHIP). Put another way, says Kahn, "Insurance isn't free, and you have to have groups with many more healthy people than sick." As a result, insurers are pushing for harsher financial penalties on Americans who would forgo insurance even in the face of a government mandate. The HELP Committee bill would charge the uninsured a minimum annual penalty of $750 for individuals, a figure that is far below the annual expenses of full-cost premiums, which insurers think the penalty should at least equal in order to succeed. The House draft includes a penalty of 2.5% of modified adjusted gross income. (Both plans include financial hardship exemptions for some Americans.)